a) According to interest rate parity (and assume it holds), if the foreign currency is expected to appreciate in the future, what do we know about the domestic interest rate compared to foreign interest rate?

b) If the expected domestic-currency return on foreign-currency denominated assets were to become temporarily higher than on domestic-currency denominated assets, what would happen to the exchange rate? Explain, and assume flexible exchange rate system.

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a According to interest rate parity and assume it holds if ... View the full answer